WEEKLY E-MAIL

29 July 2022

UNEMPLOYMENT RATE FALLS BUT THE RBA CASH RATE TO KEEP RISING

By Patrick Malcolm

Many economists are now forecasting that the Reserve Bank of Australia (RBA) will move the cash rate target to a more restrictive setting of above 3% by late 2022 – the current cash rate is 1.35%.

This primarily reflects the strong momentum in the labour market and the clear upside risks to inflation, with the June labour market data coming in much stronger than expected.

In fact, Australia just recorded its lowest unemployment rate since 1974 – dropping to 3.5%. It was the eighth consecutive monthly increase in employment, with a new record high participation rate of 66.8%.

Employment statistics show that there is now 1 unemployed person per job vacancy. Historically, this figure is typically 3 unemployed people per job vacancy in Australia.

Unemployment dropped sharply in June

In addition, job ads and vacancies are also at extremely high levels. There were almost 500,000 vacancies in May, a record high rate of 3.4% as a share of the labour force.

The large amount of job vacancies suggests that it will take a considerable slowdown in the economy for the unemployment rate not to fall further, thereby providing more fuel to inflationary concerns from the RBA.

As to how the RBA gets to a restrictive setting, repeated 50 basis point interest rate increases (0.50%) until November have now been forecast. The faster move to a restrictive rate setting will bring forward the point at which the economy slows below trend, and starts to have an effect on the unemployment rate and thereby wages growth.

It’s a difficult path for the RBA to navigate as the downside risks to the economy are significantly increased by the faster move to a restrictive cash rate setting to keep inflation in check. These include house price falls of more than 10% and a sharp downturn in household consumption.

The actions the RBA takes over the next few months are crucial in how the economic growth and inflationary outlook plays out over this period of uncertainty.

Patrick Malcolm

Senior Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2020
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@gfmwealth.com.au

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